FG targets banks’ pool of N615bn FX gain

The Federal Government is set to collect N614.9 billion from nine Nigerian banks on a one-time windfall tax from their foreign currency revaluation gains for the financial period, December 2023.

Last Tuesday, the Senate passed an amendment bill of the 2023 Finance Act, raising the windfall levy on banks’ foreign exchange revaluation gains from 50 percent as proposed by the President Bola Tinubu to 70 percent.

A windfall tax, according to Investopedia, an investment dictionary, is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits.

BusinessDay analysis revealed that the annual statements of the financial institutions showed that the nine banks recorded about N878.4 billion in foreign currency gains at the end of the reviewed year. However, since last year’s revaluation gains are unrealised ones, this may impact the application of the tax.

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The lenders include: Guaranty Trust Holding Company (GTCO) Plc, United Bank for Africa (UBA) Plc, Access Holdings Plc, FCMB Group Plc, Zenith Bank Plc, and Stanbic IBTC Holdings Plc. Others are: Wema Bank Plc, Fidelity Bank Plc. and Sterling Financial Holdings Company Limited Plc.

GTCO reported the highest foreign currency revaluation gains of N441 billion last year. With a 70 percent windfall levy, the bank would remit N309.2 billion to the FG.

Zenith Bank led in second place with N228.9 billion and will remit N160.2 billion. FCMB Group reported N83.9 billion during the period and will remit N58.7 billion.

Fidelity Bank’s FX gain stood at N44.1 billion, so the bank will remit N31 billion; UBA reported N26.5 billion and will remit N18.5 billion; Stanbic IBTC Holdings Plc posted N25.6 billion and will remit N17.9 billion.

Also, Access Holdings reported a N17.2 billion FX gain and will relinquish N12 billion; Sterling Holdco reported N6.23 billion and will remit N4.36 billion. Similarly, Wema Bank reported N4.35 billion and will remit N3.04 billion.

Further analysis of the statements revealed that the nine banks recorded a combined after-tax profit of N2.47 trillion in 2023, a 158 percent growth from N997 billion in the previous year.

The amended Finance Act was read by Sani Musa, the chairman of the Senate Committee on Finance after the Upper Chamber considered the report of the Committee on Finance before it was finally passed.

The bill now mandates that any bank failing to pay the windfall levy to the Federal Inland Revenue Service, and without a deferred payment agreement, shall be liable for the unpaid levy.

Additionally, they will incur a fine of 10 percent of the withheld or unremitted levy per annum, along with interest at the prevailing Central Bank of Nigeria (CBN) Minimum Rediscount Rate (MMR).

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Financial advisory firm, Deloitte, in a report on Wednesday entitled, ‘Proposed windfall tax on Nigerian Banks’ foreign exchange gain’ disclosed that the 2023 fiscal year was marked with a major devaluation of the Naira against other foreign currencies. This devaluation was primarily driven by the unification of FX policies announced by President Bola Ahmed Tinubu on May 29, 2023.

It said, “While the banks reported significant FX gains, many manufacturing and other businesses in the productive sector reported losses due to the impact of significant FX losses in their books.”

Deloitte noted that to address the ₦9.18 trillion budget deficit following the 2024 budget, the Federal Government plans to increase revenue either by borrowing or by taxation.

It disclosed that the government has looked to other countries that have also imposed windfall taxes like the United Kingdom’s 25 percent levy on energy profits which was further increased to 35 percent in January 2023, as well as Italy’s windfall tax on profits earned by banks from high interest rates to assist mortgage holders, among others.

“The question is – is the windfall tax on the banking sector the best option to raise revenue for the FGN?” it asked.

Moody’s Ratings (Moody’s) in a report on Tuesday said Nigeria’s proposed windfall tax on foreign exchange gains is credit-negative for banks.

According to the global rating agency, the tax will significantly reduce the profits available to banks for problem-loan provisioning and transfers to retained earnings, which form part of regulatory capital, both credit negative for the sector.

It said, “The windfall tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds.”

A breakdown of Moody’s report disclosed that the tax is in line with the Central Bank of Nigeria’s September 2023 policy prohibiting banks from using foreign-currency-related profits for operational expenses and dividends.

“We estimate the windfall tax may yield revenue of as much as 0.3 percent of 2024 GDP. Although this is not negligible given the government’s small tax intake of around 9 percent of GDP in 2023, it remains marginal and only a temporary revenue measure,” Moody’s noted.

Similarly, PricewaterhouseCoopers Nigeria (PwC) in the report entitled, ‘The Windfall Tax Conundrum: navigating the Fiscal Impact on Nigerian Banks’ stated that the Federal Government’s latest legislation to tax already reported profits of banks in 2023 could deter future investments into the country.

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According to the firm, the proposed windfall tax on Nigerian banks brings a lot of challenges and implications to the banking sector and general economy investment-wise for both foreign and local investors.

It said, “By taxing profits already realised and reported, the government risks being perceived as unpredictable, which could deter future investment and destabilise the financial markets.”

Also, analysts at FBNQuest said the tax on banks implies that the financial institutions will face significant tax burdens.

“This measure may have an impact on their profitability and capital adequacy, especially if they had anticipated using these gains as a counter-cyclical buffer against foreign exchange fluctuations, as directed by the apex bank,” they said.